TGS

Business Context and Reporting Period

Company: Transportadora de Gas del Sur S.A. (TGS)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Year ended December 31, 2012
Business Overview: TGS is a major natural gas transporter in Argentina, operating a pipeline system connecting southern/western gas fields to distributors and industries. The company also operates the Cerri Complex for natural gas liquids (LPG) processing and commercialization. The 2012 fiscal year marked the company's 20th anniversary.

Key Financial Metrics

Note: All figures are in Argentine Pesos (ARS) unless otherwise noted. Financial statements are prepared under Argentine GAAP.

Material Changes vs. Prior Period

• Revenue Growth: Total net revenues increased by 39% (Ps. 721.1 million) compared to 2011.
  • Liquids Segment: The primary driver of growth, with revenues rising Ps. 656.5 million (56%) to Ps. 1,835.7 million. This was due to higher export volumes, increased production sold on the company's own account, and peso devaluation effects.
  • Gas Transportation: Revenues increased Ps. 27.8 million to Ps. 603.4 million, driven by the full-year effect of expansion works started in late 2011 and new firm transportation contracts.
  • Other Services: Revenues grew Ps. 36.8 million, largely from construction services related to pipeline expansions.
• Profitability: Operating income rose by Ps. 153.2 million (28%). However, Net Income only increased by Ps. 8.5 million (4%) due to a significant rise in net financial expenses.
• Financial Expenses: Net financial expenses increased by Ps. 136.3 million, primarily due to a Ps. 100.5 million increase in foreign exchange losses resulting from the devaluation of the Argentine peso.
• Costs: Cost of sales increased by Ps. 414.8 million, driven by higher variable production costs for liquids (due to a government tariff charge increase) and higher export taxes.

Outlook, Risks, and Management Commentary

Outlook and Guidance

• 2013 Strategy: Management plans to work with the National Government to implement a license renegotiation agreement to ensure tariff sustainability.
• Expansion: Continued management of pipeline expansion works under the Gas Trust Fund Program is expected to generate additional revenues from operation and maintenance.
• Liquids: Focus on securing natural gas supply at reasonable costs and maximizing export prices through competitive bidding.
• Cost Control: Intent to restrain operation and maintenance cost increases while maintaining system reliability.

Risks and Contingencies

• Regulatory Uncertainty: The company is in the process of renegotiating its license with the Argentine government. The outcome of this renegotiation affects the recoverable value of regulated assets.
• Tax Credits: TGS holds tax credits (VAT and income tax) of Ps. 38.2 million arising from the reversal of a tariff increase. The timing of realization is uncertain.
• Legal Actions:
  • ENARGAS Resolutions: TGS obtained a preliminary injunction in July 2012 blocking a significant increase in a tariff charge for gas consumption (from Ps. 0.049 to Ps. 0.405 per cubic meter). If the injunction is overturned, it could result in a net loss of Ps. 56.3 million.
  • Turnover Tax: Ongoing disputes regarding turnover tax exemptions on liquids sales and taxes on gas used as fuel. Provisions of Ps. 39.1 million and Ps. 84.5 million have been recorded for these contingencies.
  • MetroGAS Receivables: MetroGAS completed its reorganization process in 2012. TGS holds receivables valued at their discounted present value due to MetroGAS's financial situation.
• IFRS Adoption: The company is required to adopt International Financial Reporting Standards (IFRS) for the fiscal year beginning January 1, 2013. Reconciliations indicate potential adjustments to equity and income.

Investor Verification Checklist

• License Renegotiation Status: Verify the progress of the comprehensive license renegotiation with the Argentine government, as this is critical for the long-term valuation of the regulated transportation segment.
• Foreign Exchange Exposure: Assess the impact of Argentine peso devaluation on future financial expenses, given the company's significant dollar-denominated debt (approx. US$ 374 million outstanding).
• Tax Credit Realization: Monitor the collection timeline for the Ps. 38.2 million in tax credits related to the reversed tariff increase.
• Legal Injunctions: Track the status of the injunction regarding the ENARGAS tariff charge increase (Resolutions No. 1,982/11 and 1,991/11).
• IFRS Transition: Review the 2013 financial statements for the first-time adoption of IFRS to understand the impact on reported equity and earnings compared to Argentine GAAP.